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Financing a DIY Owner Builder Project

In brief

  • People build new homes or renovate to add value to their home and quality to their life. To make sure these ends are achieved efficiently and cost effectively, detailed planning is essential. After you've figured out what you want to build or renovate, it's time to create a financial plan. Avoid disaster by not trying to build something beyond your financial reach.
  • Work out your borrowing power and get approved in principle.
  • Work out a weekly budget. Allow for any big life changes. For instance, if you are married or in a partnership, is a baby likely to be on the way? These kinds of events significantly affect the type of renovation or new home you can afford.
  • Be informed - ask your lender the right questions. Find out more about the initial considerations, making the right financial choice or financing a new home or extension.
  • There are specific issues for new homes and extensions
  • Be aware of substantial starting costs.
  • There are special issues associated with renovation loans.
  • There's also information for first home buyers and questions you should ask your lender.
  • Make sure you reap the financial rewards of your new home or renovation.

  • Owning your own home has always been the great Australian dream. So how do you go about financing a new home or extension ?

 

How much can you afford?

Budgeting for a new home is a serious business and there are many things you need to take into account. Firstly, you need to work out your budget. Consider your combined family income, existing liabilities, assets and savings.

Examine your current lifestyle and work out how much of your income you spend on things like eating out, shopping, holidays and gifts. If you decide to take out a mortgage you may have to make sacrifices.

It is vitally important to assess yourself honestly can you really stay in every single Saturday night or wear the same clothes for three years straight? Are you truly prepared to give up wine and weekends away? Make sure you stay realistic while you're in the exciting stage of planning.

Your 'borrowing power' is the amount a financial institution is prepared to lend you. Many lenders provide online calculators that estimate this figure for you. Simply provide information on your sources of income and your liabilities, including current credit cards. You will still need to be assessed by your lender, but can get a ball park figure for what you can borrow.

 

Pre-Approval

The next step is to get a lender to approve your loan in principle. This means you have been pre-approved for a loan up to a certain amount.

Getting pre-approval can be more important for buyers who are looking for existing property than those who are buying a new home. Some developers have an association with a particular lender and are therefore able to assess your financial situation onsite.

However, by getting pre-approved you at least have an idea of what your spending range is. You also have a benchmark which you can compare with other assessments of your financial situation.

To get your loan approved in principle, you will have to provide your lender with a number of documents. These include:

  • Proof of income (your last three payslips or a statement or earnings)
  • Details of current assets
  • Existing loan commitments
  • Details of unusual expenses
  • Proof of identity

Once you have your pre-approval, you're ready to start looking for your home - provided that you've saved for your starting costs.

 

Work out what it will cost

If you intend building, the next step is to get an idea of what you can do within your budget. You can:

  • Find out the value of homes and land in the area where you would like to build by talking to a real estate agent or valuer. The location of the land can have an impact on building costs, such as soil types and wind ratings.
  • Research the cost of all the different materials you like, from the roofing and cladding to bathroom fittings and flooring. Get an idea of the cost of installing them. Some systems are more expensive to install than others.
  • Decide how much you will be doing yourself and how much you will be paying other people to do. Be realistic. Building invariably takes longer than you think. You might think you are saving money by doing it yourself but if you are not competent you could end up paying someone else to fix your mistakes.
  • Work out what new appliances you need and get prices. Make a list of what you consider Ďmust havesí and what might need to be reconsidered or deferred to stay within budget.
  • Find out what subcontractors and designers charge. Ask them if you can see other houses they have designed or built, and what those cost.

 

Effect of design features on costs

The design of the house will affect building costs. For example, it will cost more to build a house with a complicated roof and exterior wall design than a simpler house. Interior design involving higher ceilings, or lots of walls, windows and doors will add to costs.

The type of design detail will also make a difference to how much you pay your architect or designer.

However, a good designer should be able to work within your budget to produce something that suits your needs, within reason. Some design aspects will actually save you money in the long-term. Passive energy design features like orientation of the house and large north-facing windows will save you money in heating costs. Spending a little more on good insulation will also save on heating costs.

 

Mortgages

Whether you are building or buying, once you have a good idea of what you can do within your budget, you need to start talking seriously to a bank, mortgage broker or other lenders.

It is becoming more common for people to borrow money from organisations other than banks. If you have been turned down by the banks, this may be an option, but if you are a risky proposition for the lender, you are likely to pay higher interest rates and fees. They may lend a smaller percentage of the propertyís value than banks usually provide, so you may have to top up the difference some other way.

However, non-Bank lenders can be a good option for people who want to pay off their mortgage more quickly. Some of these organisations encourage fast repayment. They may provide budgeting packages and consultants to keep an eye on you. And they may have schemes to help your debt reduce, for example, having your salary direct-credited to your mortgage account.

 

Insurance

Many banks will require you to have some sort of mortgage repayment insurance. Mortgage protection insurance cuts the risk that a sudden loss of income-earning ability will force you to give up your house. When you buy a new home, you usually take on extra financial commitments that eat up most of your income. You assume that your family's key income-earners will stay in work. And if you are paying off a mortgage when you lose your income-earning ability, your current house will probably be one of the first things that disappears from your life.

 

Mortgage Schemes

A loan option to be wary of is a scheme whereby a middleman - for example, a real estate investor - buys a property and then offers you credit to buy the property. These schemes are known by a variety of names including wrap-around mortgages, rent-to-buy, lease options, vendor finance, or installment sales contracts.

The problem with these schemes is that you donít own the property until you finish paying, so you canít sell and move somewhere else, or refinance, and if the middleman goes broke you will lose all the money youíve invested

 

Cash Flow

Any DIY Owner Builder should know the importance of cash flow - it is the lifeblood for your DIY Owner Builder Project. If the cash flow slows it can throw the whole project off schedule. In the worst case scenario, materials could not be delivered so work cannot start resulting in the subcontractors being forced to begin projects elsewhere.

There is specialist PC software for cash flow management  enabling you to forecast spending against the reality. All known invoices and forecasts should be filed complete with due dates for your staged payment records.

* The information supplied here is of a general nature only. It does not purport to provide financial advice. You should not act on the basis of information contained on this site without obtaining qualified professional advice which can be tailored to your specific circumstances and needs.

 


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